Archive for the ‘Commerce Dept’ Category

The Bureau of Industry and Security (BIS) announced a settlement with Yantai Jereh Oilfield Services Group Co., Ltd., of Yantai Shandong Province, China (“Yantai Jereh”) in conjunction with the Office of Foreign Assets Control (OFAC).

BIS alleges that the company committed four violations of the EAR (Acting with knowledge of a violation and making false statements to BIS during the course of an investigation. Yantai Jereh has agreed to pay $600,000 to BIS and the company’s 5-year denial period will be suspended if the company pays the BIS fine, in addition to the penalty under their OFAC Settlement Agreement (details below). If at any time, the company commits any violations of the Regulations or fails to pay its penalties on time, BIS can revoke the denial suspension.

The settlement between the OFAC and Yantai Jereh is concurrent with the BIS settlement. The main difference is that the company had 11 violations of the Iranian Transactions and Sanctions Regulations causing a much larger fine of $2,774,972. All 11 violations involved exportation or rexxeportation or the attempted exportation or reexportation of US goods to Iran by way of China. Two of the 11 shipments of oilfield equipment spare parts (coiled tubing strings and pump sets) were seized by US Customs and Border Protection before they left the US.

OFAC determined that the violations constituted an egregious case and the company did not voluntarily disclose their violations.

As provided by the Export Control Reform Act of 2018, Commerce seeks to identify “emerging and foundational technologies” that are “essential to the national security of the United States.” The goal is to restrict foreign access to designated technologies without hampering their development in the United States.

The end result will be an expansion of the Commerce Control List beyond its current coverage. Although the levels of control on such newly-designated items are open to discussion, the agency pointed out that “at a minimum it must require a license for the export of emerging and foundational technologies to countries subject to a U.S. embargo, including those subject to an arms embargo”.

That “arms embargo” language should catch your eye, since China is among the countries covered. This means that sharing of “emerging and foundational technologies” with China, as well as “deemed exports” to Chinese nationals, would become licensable transactions in place of their current license-free authorization.

The agency seeks comments on such points as defining emerging technologies and their levels of development in the United States and abroad, identifying those important to national security, inclusion of other categories and the impact that “controls would have on U.S. technological leadership.” Although “foundational technologies” will be covered at a later date, Commerce also seeks comments “on treating emerging and foundational technologies as separate types of technology.”

Given that imported products from industry sectors within the “Made in China 2025” initiative have been covered by the Section 301 tariffs, the “emerging and foundational technologies” initiative seems like another full-bore effort to slow China’s technological development; in fact, there is some overlap between the two lists. The portents for U.S. companies and their foreign partners, of course, is that previously-unrestricted sharing of whatever technologies ultimately are designated is coming to a close.

Comments to the Department of Commerce, Bureau of Industry and Security are due by January 10, 2019.

The US has been pushing Hong Kong to enforce more of the United Nations sanction on North Korea and Iran, as well as export controls on controlled items. The US Department of State and US Department of Commerce met with Hong Kong government agencies this month to look over recent steps that Hong Kong has taken to implement the sanctions. Hong Kong has passed new laws that will make it harder to register and operate shell companies in the city in hopes of keeping people from using the city as a “safe harbor” for illicit trade with North Korea.

In November, an annual report of the US-China Economic and Security Review Commission suggested that the US Department of Commerce review its export control policy for civilian technology with military applications in relation to Hong Kong and China. The report said that Hong Kong was moving closer to becoming “more like any other Chinese city,”

The Bureau of Industry and Security published a notice today seeking public comments on how it should define and identify a wide variety of emerging technologies that are not now controlled for export, but should be because they are essential to the national security of the United States.

This request for comments is the public start to the most complex, intellectually challenging and economically significant effort to identify simultaneously multiple disparate categories of undefined emerging technologies for non-specific national security concerns that warrant (i) unilateral controls on their export to foreign countries, (ii) limitations on their release to foreign persons in the United States and (iii) additional mandatory filing requirements with CFIUS for non-controlling foreign investments of any size in U.S. businesses in a wide variety of sectors.

The Request for Comments Is the Start of the Public Process to Address Concerns About Uncontrolled Transfers of Emerging Technologies

The Commerce Department’s Bureau of Industry and Security (BIS) notice is the administration’s first public step to comply with the requirements of Section 1758 of the Export Control Reform Act (ECRA), which became law on August 13, 2018. As described in previous alerts, Congress created the section to address concerns about a provision in the bills introduced in late 2017 that would have expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) over investments by U.S. companies in foreign countries that could result in the release to foreign persons of uncontrolled critical technology, including emerging and foundational technologies. Section 1758 addresses the policy concerns of the original CFIUS outbound control provision, but through an ongoing, regular-order, interagency export control process that includes public notice and comment.

Commerce has not proposed in the notice any new export controls or amendments to existing regulations. Rather, it seeks the public’s assistance in creating criteria for identifying specific emerging technologies that are “essential to the national security of the United States,” which is the statutory standard for imposing controls on emerging and foundational technologies. “National security” is not defined in the law or the notice. The notice’s examples of concerns to be addressed do not include the domestic economic policy concerns identified as national security issues in other administration actions, such as those pertaining to the importation of steel and aluminum. Rather, the examples provided are those with “potential conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications or could provide the United States with a qualitative military or intelligence advantage.”

The administration will review the public comments, along with its own analyses, as part of its plan to prepare a proposed rule to add emerging technologies to the Commerce Control List (CCL) of the Export Administration Regulations (EAR). The proposed rule will identify the countries, end uses or end users to which exports of the newly identified technologies would require a license. After interagency review of the comments on the proposed rule, Commerce plans to publish a final rule implementing the new controls. (If the final rule is consistent with the EAR’s “deemed export” rule, releases of the technology to foreign persons in the United States would require a license if a license was required to export the technology to that person’s home country.) The notice does not contain a schedule for when these events will occur. ECRA requires the administration to ask the relevant multilateral export control regimes to add the newly controlled emerging technologies to the multilateral export control lists. Until and unless that happens, however, the controls will be unilateral, meaning that only the United States will impose them.

The implications of this emerging technology effort are not just with respect to potentially new export controls. Any technologies identified in the export control regulations as “emerging” will also be “critical technologies” under the new CFIUS law, the Foreign Investment Risk Review Modernization Act (FIRRMA). As described in our earlier alert, this means that U.S. businesses that produce, design, test, manufacture, fabricate or develop such technologies and use them in or design them for targeted sectors would be subject to a CFIUS pilot program implementing FIRRMA. Consequently, controlling foreign investments, along with certain non-controlling foreign investments, would be subject to a mandatory filing requirement with CFIUS 45 days before closing.

Standards for Determining What Emerging Technologies Should Become Controlled

In deciding whether to identify a technology as “emerging” and impose controls on its export, ECRA Section 1758 requires the administration to take into account:

the development of the technology in foreign countries

the effect that export controls imposed pursuant to this section may have on the development of the technology in the United States

whether export controls would be effective in limiting the technology’s proliferation to, or development in, foreign countries.

Section 1758 is an element of the broader ECRA statement of policy for export controls, which is that the United States should “use export controls only after full consideration of the impact on the economy of the United States and only to the extent necessary — (A) to restrict the export of items which would make a significant contribution to the military potential of any other country or combination of countries which would prove detrimental to the national security of the United States; and (B) to restrict the export of items if necessary to further significantly the foreign policy of the United States or to fulfill its declared international obligations.”

III. The Representative Emerging Technologies Identified

Neither the notice nor ECRA defines the term “emerging” technologies. To help inform the administration’s development of a proposed rule, the notice lists several broad categories of technologies that may meet the standard of “emerging” for public comment. The listed technologies are “representative” of only the types of technologies that might be considered “emerging” and warranting control. They include:

“Advanced surveillance technologies, such as faceprint and voiceprint technologies.”

These are not the headings in the notice; they are the entirety of the topics listed for public comment. No additional details or definitions are provided about the meaning of these terms. The notice also does not contain any commentary or guidance on what the potential national security concerns are, or could be, with respect to such technologies, or why Commerce identified these technologies as examples.

The Comments That Commerce Seeks

Commerce asks industry for comments—within the next 30 days—on:

how the administration should define emerging technologies

what the criteria should be for determining whether there are specific technologies within these general categories that are important to U.S. national security

what sources the administration can refer to in order to identify emerging technologies

what other general technology categories might be important to U.S. national security and warrant control

information about the status of development of the listed technologies in the United States and other countries

information about what impact the specific emerging technology controls would have on U.S. technological leadership

suggestions for other approaches to identifying emerging technologies warranting controls.

BIS’s first request for comment is about how the administration should define emerging technologies. Because this request is not for advice about abstract or generally applicable definitions, but rather about how the term should be defined in the context of export controls to address the policy concerns that motivated ECRA, a logical approach would be to bind the definition by the statements of policy in ECRA for why the export control system exists and what it is designed to accomplish. Also, given that ECRA Section 1758 is focused on identifying both emerging and foundational technologies, a definition should not include foundational technologies. Thus, an example of a definition that would be consistent with the ECRA standards could be something along the lines of:

“Emerging technologies” are specific, non-mature (i.e., developmental) core technologies essential to the national security of the United States that:

are required for the development, production, use, operation, installation, maintenance, repair, overhaul or refurbishing of specific and identifiable potential conventional weapons, intelligence collection, weapons of mass destruction or terrorist applications;
ii. could provide the United States with a specific and identifiable qualitative military or intelligence advantage;
iii. are not available in or otherwise being developed in foreign countries; and
iv. are not within the scope of any existing multilateral controls.

Note: A technology must not be identified or controlled as “emerging” unless it is within the scope of policy statements in ECRA for which technologies should be controlled for export. In particular, a technology must not be so identified if a unilateral export control over it would:

harm domestic research into the identified technology;
ii. not be effective at preventing countries of concern from developing it indigenously or otherwise acquiring comparable technology from third countries;
iii. be imposed without full consideration of the impact on the economy of the United States of such a control; or
iv. is of a type that is not likely to be considered acceptable by the multilateral regime allies, or that is inconsistent with the standards for the types of controls that are subject to the multilateral regimes.

Each commenter will likely have its own take on how to approach BIS’s first question. Nonetheless, this is an example of a definition that would be consistent with the standards in ECRA.

Items to Which the Notice Does Not Apply

Both ECRA and the notice refer to only possible additional controls on emerging “technology.” ECRA defines “technology” as including “information, in tangible or intangible form, necessary for the development, production, or use of an item.” Thus, the scope of the notice is limited to possible new controls on information that is within the scope of the term “technology” and does not include possible new controls on commodities (i.e., physical items) or software.

The notice also does not apply to “foundational” technologies, which will be the subject of a similar process beginning in 2019. It also does not apply to technology the EAR already exempts from being “subject to the EAR,” such as information that results from “fundamental research” or that is “published” information. This does not mean that EAR99 technologies— technologies that are “subject to the EAR” but not identified on the EAR’s CCL—are exempt from the notice’s scope. To the contrary, the entire purpose of the effort is to identify EAR99 technologies that should be added to the CCL and controlled.

Finally, the notice does not apply to technology already identified on the CCL, the U.S. Munitions List (USML), or another of the U.S. government’s export control lists. Thus, for example, the notice does not seek comment on technology or technical data directly related to or required for the development or production of military items because they are already controlled on the CCL or the USML in specific and broad catch-all categories. Herein lies one of the significantly challenging aspects of the effort. The administration is asking industry to provide advice on which non-mature technologies not directly related to or required for military items are “essential to the national security of the United States.” This is, of course, better than not asking for comments and is an important effort required by ECRA, but it is nonetheless an inherently difficult one for those experts in the referenced technologies who have no national security experience.

Who Should Prepare and File Comments, and What Should They Include?

The notice is open for comments from the public. In particular, any company that develops or produces the types of technologies described on the representative list, or individuals who are experts in the listed or other potentially emerging technologies, should consider submitting comments. Industry will often have more information than the government about their own technologies, including whether they qualify under the statutory standards, and how to describe most accurately the technologies at issue.

Industry will also generally have more information than the government on which technologies are already being developed outside the United States. If a technology is already available outside the United States, ECRA makes clear that it would generally not be a good candidate for a unilateral (i.e., U.S.-only) control because the United States will have no ability to curtail its transfer to destinations, end uses and end users of concern. For comments on foreign availability to be effective, they must be supported with evidence. Companies will, of course, not have proprietary information of their competitors. They will, however, often have a sense for comparable technologies that competitors and academics are already developing through sources such as academic publications, web sites, trade shows, customer comments and government reports.

Industry is also generally in a better position to describe whether, as both a legal and a psychological matter, the imposition of a unilateral export control (and increased foreign investment controls) on a particular technology would be harmful or helpful to domestic research into the identified technology, such as through loss or gain of investments, foreign markets or the availability of qualified professionals necessary to develop it. In particular, commenters should provide estimates in their comments on what the economic implications would be—good or bad—of a unilateral control on the technology and economic sector they know best. Similarly, if a company or individual has reason to believe that an uncontrolled emerging technology has specific application to a conventional weapon, intelligence collection capability, weapon of mass destruction or terrorist activities, or would help or harm a qualitative military or intelligence advantage for the United States, then the notice asks for such information.

All comments filed are made public. Some companies and individuals, however, may not want to publicly disclose what a particularly sensitive military application for their technology could be. Others may not want to describe publicly, and thus to their competitors, what novel commercially sensitive technologies they are developing. If one has such concerns, a common next step is to contact Commerce to discuss how or whether it would be possible for the government to nonetheless get the benefit of the insight.

VII. 30 Days Over the Holidays

Commerce is asking for a massive amount of difficult-to-assemble information on a wide variety of non-mature, hard-to-define technologies, and subsets thereof, and commentary on national security concerns known to only a few people outside of government within 30 days. This period is not only over the holiday season, but also in the heart of the fourth quarter when company engineers, researchers, sales staff, management and other professionals are focused on completing annual sales, shipments and other goals. Although responses to most BIS notices can be primarily handled by trade compliance professionals, quality responses to this notice largely depend upon time-consuming and thoughtful input from professionals not normally involved in export control issues.

BIS requests for information involving far less complex issues have had far longer comment periods. For example, BIS gave industry 60 days to submit comment on (i) possible changes to controls on a small number of specific infrared detection items, (ii) possible controls over spraying and fogging systems, and (iii) whether requirements should be imposed on the export of electronic waste.

ECRA does not impose a 30-day, or any other, time limit on this process or require that all emerging technologies of potential national security concern are of equal significance. Moreover, a core element of ECRA Section 1758 is that the identification process be informed by “multiple sources of information.” There will indeed be a proposed rule on which industry will have an opportunity to provide comments before any final controls are imposed. If, however, you do not believe that 30 days is sufficient to provide comments commensurate with the national and economic security significance, and technological complexity, of such a proposed rule, then you should make that comment, too, and ask for additional time, ideally before Thanksgiving.

The Congressional Research Service (CRS) released “The U.S. Export Control System and the Export Control Reform Initiative” providing a full report on several aspects of the US export control system. The report provides background on policies and the possible future systems but with very few details (Congress will debate on whether the regulations should eventually have only one licensing agency).

Si Chen, 33, known as “Cathy Chen” plead guilty to illegally exporting sensitive space communications technology to China was sentenced this month to 46 months in prison. Chen was arrested in May 2017 after an investigation by the Office of Export Enforcement uncovered her elaborate scheme involving illegal exports, money laundering, and forged passports.

Court documents show that from March 2013 to the end of 2015, Chen purchased and smuggled “jammers” which are used in military communications as well as devices used in space communication applications. The devices were worth more than $100,000 and required a license from the Department of Commerce for regional stability and national security reasons. Chen forged her passport, she used a Chinese passport with her photo on it and the name, “Chunping Ji” which she used to rent an office in Pomona, California where she would receive the export-controlled items. After she had the items, she would then ship them to Hong Kong using the false name on the passport, false product descriptions, and she undervalued the items on the shipping documents to avoid red flags or suspicions. Once the items reached Hong Kong they were then transshipped to China. Chen received the money for the items via an account at a bank in China in one of her family member’s names once the items reached China.

United States Attorney Nick Hana explained during the sentencing, “This defendant knowingly participated in a plot to secretly send items with military applications to China. The smuggled items would be used in a number of damaging ways, including in equipment that could jam our satellite communications. We will aggressively target all persons who provide foreign agents with technology in violation of US law.”

Mohawk Global Logistics Corp. has been fined $155,000 for 3 violations of the Export Administration Regulations (EAR) related to exporting to companies on the Entity List.

Around August 2012 Mowhawk exported an LNP-20 Liquid Nitrogen Plant (EAR99 and valued at $33,587) to the All-Russian Scientific Research Institute of Experimental Physics (VNIIEF). The company had a screening process in place and when they screened VNIIEF they got a hit and the shipment was initially flagged. During the BIS investigation Mowhawk acknowledged that the export supervisor accidently overrode (or ignored) the red flag and the shipment was processed. Mowhawk filed EEI and listed the shipment as No License Required (NLR) which would have been accurate had the end user not been on the Entity List. Since VNIIEF is a denied party a license is always required to export any items subject to the EAR. This was the 1st of 3 total charges.

In February 2014 and August 2015, Mokhawk once again exported to an organization on the Entity List, but this time they were in China. The company exported Real-Time Back Reflection Laue Camera Detectors and Accessories (EAR99 and valued at $177,156) to the University of Electronic Science and Technology of China (UESTC). Once again, Mowhawk used screening software, but this time it failed to flag the transaction because Mowhawk didn’t screen UESTC’s full, unabbreviated name. This could be a common mistake, however, all of the documents that UESTC provided to Mowhawk clearly identified UESTC’s full name as it was listed on the Entity List along with an almost exact matching address. The shipment was processed in February 2014 and they filed EEI as NLR. As with the first charge, had the export not gone to someone on the Entity List a license likely would not have been required.

In August 2015 Mowhawk exported the same exact items to UESTC after they had been returned for warranty repair. This time, Mowhawk didn’t screen the transaction at all using their screening software and there was no EEI filed in connection with this particular export to UESTC. These transactions were charges 2 and 3.

Settlement Agreement:

Pay $135,000 in 3 separate payments

Payment of the remaining $20,000 is suspended as long as the company pays the $135,000 on time.

If payments are not received on time, BIS may issue an order denying all of Mowhawk’s export privileges

Mowhawk can’t take any action or make any public statement denying the allegations in the BIS Charging Letter or Order

ZTE Chairman Yin Yimin released a letter in the first part of June to customers and employees promising that there would be no further compliance violations. He apologized to customers for the disruption that the violations of US export controls caused and apologized to ZTE’s 80,000 employees whose jobs were in jeopardy after ZTE was put on the US denial list and no longer had access to US technology which suspended most of the company’s operations. **An employee who asked not to be identified further confirmed Yin sent a letter but would not confirm its contents.

The US did agree to restore ZTE’s access to US components in hopes of reducing the likelihood of a prolonged escalation of tensions over tariffs.

Yimin’s letter did say that the issue will not be fully resolved until the US government approves the agreement and unspecified conditions are met. Below you will find the conditions specified by BIS.

BIS will remove ZTE from the DPL Denied Persons List after ZTE makes the required payment and deposit into escrow. Under the new agreement, ZTE must pay $1 billion and place an additional $400 million in suspended penalty money in escrow before BIS will remove ZTE from the Denied Persons List. These penalties are in addition to the $892 million in penalties ZTE has already paid to the U.S government under the March 2017 settlement agreement.Within 30 days of the date of the order, BIS will select and ZTE shall retain at its expense an independent Special Compliance Coordinator (“SCC”) to coordinate, monitor, assess, and report on compliance by ZTE and its subsidiaries and affiliates worldwide. This team of Special Compliance Coordinators will be answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. This is the first time BIS has achieved such stringent compliance measures in any case. These collectively are the most severe penalty BIS has ever imposed on a company.

ZTE must also:

Replace the entire board of directors and senior leadership for both entities

Complete and submit nine audit reports of its compliance with U.S. export control laws;
Ensure that all records required to be kept or retained under the Regulations are stored in or fully accessible from the United States;

Publish on its website all Export Control Classification Numbers as necessary to determine applicable requirements;

Hold two public symposia in China regarding compliance with applicable U.S. export control regulations.

Suspended Debarment: 10 years from the date of this order, unless ZTE completes the full and timely payment as described above.

On May 24, 2018, the U.S. Departments of State and Commerce officially published proposed rules to transition most firearms and ammunition away from the export controls of the Department of State’s International Traffic in Arms Regulations (ITAR) over to the controls of the Department of Commerce’s Export Administration Regulations (EAR). In this alert, the second of four installments, we will examine the proposed revisions to the ITAR control list, the U.S. Munitions List (USML) Category I, and the Department of Commerce’s proposed companion rule amending the Commerce Control List (CCL).

Both the State and Commerce Departments are seeking written comments on the proposed rules, which will be accepted until July 9, 2018. We strongly encourage industry to take time to carefully review the revised categories and provide actionable commentary to the proposed rules. This is a critical opportunity for industry to provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles that will remain subject to the ITAR. The specific instructions for submitting comments are included in each proposed rule.

Proposed Transitions from USML Cat. I to CCL

Title for this category will change from “Firearms, Close Assault Weapons and Combat Shotguns” to “Firearms and Related Articles.”

Articles Removed from USML Cat. I – State’s rule proposes to transition away from the USML non-automatic and semi-automatic firearms up to and including .50 caliber currently controlled under paragraph (a), as well as all parts, components, accessories and attachments specially designed for those firearms. These items will be subject to the EAR under newly created “500 series” Export Control Classification Numbers (ECCNs).

Commerce originally created the “500 series” as part of “Export Control Reform” under the Obama Administration to control items that had been from the USML or certain items on the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies Munitions List (the “Wassenaar List” or WAML). Compared to the “600 series” ECCNs, which control items of a military nature removed from the USML, the “500 series” contain items not appropriate for the 600 series control because they have predominant civil, recreational, law enforcement, or other non-military applications.

To capture the firearms and ammunition in USML Cats. I-III that will transition to the CCL, Commerce proposes in its companion rule to create a total of 17 new ECCNs. For the firearms, parts, components, accessories and attachments that will transition from USML Cat. I, the proposed new ECCNs are:

– 0A501 (Firearms and related commodities)

– 0A502 (Shotguns and certain related commodities)

– 0A504 (Optical sighting devices and certain related commodities)

– 0E501 (Technology for firearms and certain related items)

– 0E502 (Technology for shotguns)

– 0E504 (Technology for certain optical sighting devices)

Articles Still Controlled Under USML Cat. I – items that would remain under Category I are positively listed as follows, including the corresponding paragraph (Significant Military Equipment (SME) is designated with an asterisk (*)):

(g) Barrels, receivers (frames), bolts, bolt carriers, slides, or sears specially designed [emphasis added] for the articles in paragraphs (a), (b), and (d) of this category.

(h) Parts, components, accessories, and attachments, as follows:

(1) Drum and other magazines for firearms to .50 caliber (12.7 mm) inclusive with a capacity greater than 50 rounds, regardless of jurisdiction of the firearm, and specially designed [emphasis added] parts and components therefor;

(2) Parts and components specially designed for conversion of a semiautomatic firearm to a fully automatic firearm[emphasis added].

(3) Accessories or attachments specially designed to automatically stabilize aim (other than gun rests) or for automatic targeting, and specially designed parts and components therefor [emphasis added].

Technical Data and Defense Services – paragraph (i) specifies “technical data,” as defined in ITAR §120.10, and “defense services,” as defined in ITAR §120.9, directly related to the defense articles described in paragraphs (a), (b), (d), (e), (g), and (h) of Cat. I, and classified technical data directly related to items controlled in ECCNs 0A501, 0B501, 0D501, and 0E501 and defense services using the classified technical data. Exemptions will continue to be covered in ITAR §125.4.

Revised USML Cat. I will also include several notes to explain what items are excluded by the category (non-automatic and semi-automatic firearms up to and including .50 caliber; non-automatic shotguns; BB, pellet, and muzzle loading (e.g., black powder) firearms; and parts, components, accessories, and attachments of firearms and shotguns in paragraphs (a), (b), (d), and (g) of Cat. I that are common to non-automatic firearms and shotguns) and what is meant by firearm, fully automatic firearm or shotgun, or caseless ammunition.

The proposed rule also adds a new paragraph (x) to Cats. I, II and III to allow for ITAR licensing of commodities, software and technology subject to the EAR, which paragraph has already been added to all of the other USML categories that have gone through the rewrite process. It is important to note that paragraph (x) is only available if those items EAR items are to be used in or with defense articles controlled in USML Cat. I, and the items are described in the purchase documentation submitted with the ITAR license application. Further, it is important to understand that such EAR items, even if included on an ITAR export license under USML Cat. I(x), would remain subject to the controls of the EAR, despite the appearance of the ITAR license. Use of paragraph(x) is a licensing convenience only; it does not change the jurisdictional status of an item. Consequently, it will be incumbent on the U.S. exporter to properly educate its customers on the proper licensing authority, especially for reexport and retransfer requests.

CCL Controls

A key fact in the proposed rules is that the transition from USML to CCL will NOT result in a decontrol of firearms or ammunition. Firearms transitioning from the USML to CCL will be subject to controls under National Security (NS), Regional Stability (RS), Crime Control and Detection (CC), Firearms Convention (FC), United Nations Sanctions (UN) and Anti-Terrorism (AT). Indeed, the proposed rules make it abundantly clear that BIS will require licenses to export or reexport to ANY country firearms or other weapons that transitions from the USML to the CCL.

License exceptions, such as limited value shipments (LVS), government (GOV), baggage (BAG) and strategic trade authorization (STA) will be very limited for small arms formerly on the USML, so industry should carefully review the ECCNs in the proposed rule to see what license exceptions are available for each ECCN and the limitations.

Each new ECCN will be made up of technically specific subparagraphs in an enumerated “List of Items Controlled.” For example, the list of items controlled under ECCN 0A501 is comprised of paragraphs .a – .w, which identify the items classified under the particular paragraph. The ECCN also includes .x and .y paragraphs for parts and components. The .x paragraph operates like a catch-all, as it lists specially designed parts and components that are not controlled elsewhere. Conversely, the .y paragraph lists only those parts, components, accessories, and attachments that are controlled only for UN and AT reasons. Such items may be exported to nearly all destinations without a license. The parts and components captured by the .x paragraph, on the other hand, are subject to NS, RS, FC, UN, and AT and will likely require a license for most destinations.

It will be incumbent on the exporter (or temporary importer) to review every firearm and firearm part, component, accessory, and attachment in which it deals so as to determine the new classification once the rules become final. The specific license requirements, and the applicability of license exceptions, as well as any end-use or end-user restrictions, will depend on the specific subparagraph classification of the governing ECCN.

Specially Designed

A critical concept in the proposed revisions to the control lists is the term “Specially Designed.” This term has been reviewed, criticized, discussed, and analyzed in depth since it was first incorporated into the ITAR and the EAR in the initial implementation rules for Export Control Reform, which DDTC and BIS published in the Federal Register on April 16, 2013.

This term is NOT up for public comment at the present time, but to understand the proposed revisions to the USML and CCL control lists for firearms and ammunition, it is imperative to comprehend the term. Both the ITAR and EAR use the term, “Specially Designed” to remove the catch-all controls currently present in the USML Cats. I-III and to designate what parts, components, accessories and attachments are subject to either the ITAR or the EAR. We have highlighted the proposed use of “specially designed” in USML Cat. I in the list above.

It is important to note that the “specially designed” analysis is not applicable to the entire USML Category, as it can be used only if it is specified within a particular paragraph. As the revisions to Cat. I are intended to make the list a positive list and include only those articles that warrant control under the ITAR for the reasons stated previously, there should be a bright line between those articles subject to the ITAR and those subject to the EAR. Industry therefore must carefully review the full definition of “Specially Designed” and the application to the proposed revisions of Cat. I and provide comments that would assist the government in reducing jurisdictional ambiguities and clarifying the articles subject to the ITAR.

Industry should also review the ITAR order of review outlined in 22 C.F.R. § 121.1(b)), and the Order of Review Decision Tool available on DDTC’s website. BIS also provides an Order of Review Decision Tool on its website.

Industry should be forewarned not to underestimate the time intensive process of classifying the parts, components, attachments and accessories for firearms under the proposed rules. A critical component is the specially designed analysis, which itself is complex and difficult to understand immediately. It would be foolish to skip over classification, as license requirements, applicability of license exceptions, and restrictions are dependent on the classification, down to the specific ECCN paragraph. Further, export license applications will require identification of the specific subparagraph of control as well. The days of simply identifying “paragraph (h)” for any and all parts and components are quickly coming to an end.

Brokering

In addition to the proposed revisions to the USML Cats. I-III, DDTC’s proposed rule identifies several “conforming changes” in other parts of the ITAR to remove references to firearms that will be controlled on the CCL. One such revision is to section 129.1 to clarify that regulations on brokering activities apply to defense articles and defense services designated on the USML as well as items described on the U.S. Munitions Import List (USMIL) for permanent import controls. The USMIL is promulgated by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) pursuant to the permanent import provisions of the Arms Export Control Act. ATF’s regulations are in 27 C.F.R. Pt. 447, and the USMIL is in 27 C.F.R. § 447.21.

According to DDTC, “the items that will move to the CCL for export control purposes, yet are on the USMIL for permanent import purposes, remain subject to the brokering requirements of [ITAR] part 129 with respect to all brokering activities, including facilitation in their manufacture, export, permanent import, transfer, reexport, or retransfer.” 83 Fed. Reg. at 24199 (May 24, 2018). Approaching this from the catch and release analysis that has permeated export control reform, this is the “catch.” The proposed revision in section 129.2, however, adds the following release in a new paragraph (vii) for activities that are NOT considered brokering activities:

“Activities by persons to facilitate the export, reexport, or transfer of an item subject to the EAR that has been approved pursuant to a license or license exception under the EAR or a license or other approval under this subchapter.”

As written, this language is very broad because the clause “that has been approved” does not limit past approvals to the person engaging in the subject activities. Further, the past approvals may be from either an EAR or an ITAR authorization.

Electronic Export Information Filings to Automated Export System

A critical change in the proposed rules lies within the Department of Commerce proposed rule relating to the Electronic Export Information (EEI) filings to Automated Export System (AES). According to the proposed rule, AES filings would be required for exports of all firearms transitioned to the CCL from the USML, regardless of value or destination. This requirement would also extend to temporary exports under license exceptions TMP or BAG.

In addition, the rule proposes to expand the required data elements of AES filings to include serial numbers, make, model, and caliber for such firearms. Industry should carefully evaluate the impact this requirement will have on operations and include in comments to the proposed rules.

Temporary Imports

The proposed Commerce rules set out a new process in 15 C.F.R. 758.10 for temporary imports of items subject to both the EAR and the USMIL. The process would impose entry clearance requirements for firearms temporarily imported into the United States for a period not to exceed 1 year, and then would require the use of the TMP license exception for the return export.

For the inbound transaction, U.S. Customs and Border Protection would be charged with collecting identifying information necessary to track the items temporarily imported, such as the list of firearms with serial numbers, model, make, quantity, and value, as well as other import and supporting documents. For the export, a license would not be required, but CBP would match the export to the information received upon entry. Firearms may not be imported from or ultimately destined to certain proscribed or restricted countries, and the proposed rule includes language that would instruct importers to contact CBP at the port of import or export for the proper procedures to provide any data or documentation required by BIS. Commerce is seeking comment from industry on this proposed new process.

This brings to a close this second installment of our four-part series on the proposed rules transitioning firearms and ammunition from the USML to the CCL. In our next two alerts we will examine the proposed revisions to USML Cats. II and III and the new EAR controls.